I live in Australia and do invest in Australian shares/stocks.
I thought I would post up a little bit of information for those who are unaware of the dynamics of our stockmarket.
The first thing to note is that average dividend yield for Australian shares is quite high. This is in part due to our tax system. We have a dividend tax imputation system called franking credits. In many countries profits are taxed and dividends are taxed again i.e. double taxation.
In Australia companies get franking credits from the tax office based on the amount of tax they have paid on their profits which they can then attach to the dividend paid to shareholders to avoid double taxation. For example if a company earns $1 million dollars in pre-tax profit and pays 30% tax (the standard company tax rate though there are exceptions) that is $300,000 in tax paid. If the company pays $700,000 in dividends it will also attach $300,000 in franking credits to offset the tax they must pay on their income. If the person has a low tax rate e.g. self managed superannuation fund or unemployed person then the excess franking credits will be returned to them by the tax office as a cheque/debit.
For example if a shareholder recieves a dividend of $7000 with $3000 of attached franking credits but their tax bill for the year is only $1000 the ATO (Australian tax office) will refund them cash of $2000.
This dynamic means that many companies (especially the "blue chip" ones) will pay high dividends because investors often demand it. The average dividend payout ratio for large companies is between 60% and 70% currently. It is common for large companies to pay between 3 and 7% dividend yields plus franking credits with the average dividend yield for large companies being 4 or 5% plus franking credits. For smaller companies the yield may be higher or lower depending on the type of company. The dynamic of high dividend payout ratios coupled with a mature economy with oligopoly type large business and a currently sluggish (but still growing) economy means that on average currently there is really no aggregate earnings growth coming from large companies. Only a minority of large companies (mostly the ones which have expanded successfully overseas) are producing respectable earnings per share growth. Our large stocks therefore in the current environment are mostly good for yield but not for capital growth.
It is important to note that overseas investors are not always eligible for franking credits. Also Australian companies only generate franking credits on profits/taxes generated in Australia. Therefore companies with a high component of overseas earnings in Australia will typically only pay partially franked or unfranked dividends.
The Australian stock market is not necessarily reflective of the economy as a whole. The financial and resources (mining and energy) sectors present a far bigger proportion of the imdex than they do of the overall economy. Also the index weightings are very heavily lopsided to the top 50 stocks (from memory they make up nearly half the capitilization of the sharemarket indices).
Also our stock market is full of speculative stocks. There are in any given year two thousand and something (the number fluctuates) companies listed on the ASX (Australian Securities Exchange) but typically only 600 to 700 delcare a profit in any given year (due to the high number of speculative mining, energy, technology and biotechnology earpy stage loss making companies). In the U.S. they have companies that have increased dividends every year for 20, 30, even 50 years in a row. In Australia no such companies exist to my knowledge. We simply do not have the global powerhouse brands found in U.S.A. and Europe such as Nestle, Johnson and Johsnon, Unilever, 3M, etc that are capable of producing such consistent performance. Therefore typically when you buy an Australian company at some point you must sell because it becomes mature and runs out of growth/steam. We do not have the type of stocks you can pass on to your grandkids here.
Also Australian companies are usually small on a global scale (with a few exceptions) and when they try to expand overseas they typically lose a bunch of shareholders money and then divest their foreign operations to "focus on our core domestic market". The Australian companies that expand overseas profitably are the exception, although we do have a few global leaders (in the top 5 companies globally) in the online and the healthcare spaces such as Seek, Realestate.com, Computershare, CSL and Cochlear.
We do have some dynamic growing smaller companies but in Australia because there are a glut of analysts and fund managers (more managed funds than stocks) chasing a small pool of profit making companies even when a company with only $5 million in revenue turns profitable (for example less than a million in NPAT) there will often be three stock broking analysts covering the stock and multiple small and microcap fund managers buying it. This makes it relatively hard to find bargains in the micro-cap to small cap end compared to many other markets
If anyone has any questions feel free to ask away.
I thought I would post up a little bit of information for those who are unaware of the dynamics of our stockmarket.
The first thing to note is that average dividend yield for Australian shares is quite high. This is in part due to our tax system. We have a dividend tax imputation system called franking credits. In many countries profits are taxed and dividends are taxed again i.e. double taxation.
In Australia companies get franking credits from the tax office based on the amount of tax they have paid on their profits which they can then attach to the dividend paid to shareholders to avoid double taxation. For example if a company earns $1 million dollars in pre-tax profit and pays 30% tax (the standard company tax rate though there are exceptions) that is $300,000 in tax paid. If the company pays $700,000 in dividends it will also attach $300,000 in franking credits to offset the tax they must pay on their income. If the person has a low tax rate e.g. self managed superannuation fund or unemployed person then the excess franking credits will be returned to them by the tax office as a cheque/debit.
For example if a shareholder recieves a dividend of $7000 with $3000 of attached franking credits but their tax bill for the year is only $1000 the ATO (Australian tax office) will refund them cash of $2000.
This dynamic means that many companies (especially the "blue chip" ones) will pay high dividends because investors often demand it. The average dividend payout ratio for large companies is between 60% and 70% currently. It is common for large companies to pay between 3 and 7% dividend yields plus franking credits with the average dividend yield for large companies being 4 or 5% plus franking credits. For smaller companies the yield may be higher or lower depending on the type of company. The dynamic of high dividend payout ratios coupled with a mature economy with oligopoly type large business and a currently sluggish (but still growing) economy means that on average currently there is really no aggregate earnings growth coming from large companies. Only a minority of large companies (mostly the ones which have expanded successfully overseas) are producing respectable earnings per share growth. Our large stocks therefore in the current environment are mostly good for yield but not for capital growth.
It is important to note that overseas investors are not always eligible for franking credits. Also Australian companies only generate franking credits on profits/taxes generated in Australia. Therefore companies with a high component of overseas earnings in Australia will typically only pay partially franked or unfranked dividends.
The Australian stock market is not necessarily reflective of the economy as a whole. The financial and resources (mining and energy) sectors present a far bigger proportion of the imdex than they do of the overall economy. Also the index weightings are very heavily lopsided to the top 50 stocks (from memory they make up nearly half the capitilization of the sharemarket indices).
Also our stock market is full of speculative stocks. There are in any given year two thousand and something (the number fluctuates) companies listed on the ASX (Australian Securities Exchange) but typically only 600 to 700 delcare a profit in any given year (due to the high number of speculative mining, energy, technology and biotechnology earpy stage loss making companies). In the U.S. they have companies that have increased dividends every year for 20, 30, even 50 years in a row. In Australia no such companies exist to my knowledge. We simply do not have the global powerhouse brands found in U.S.A. and Europe such as Nestle, Johnson and Johsnon, Unilever, 3M, etc that are capable of producing such consistent performance. Therefore typically when you buy an Australian company at some point you must sell because it becomes mature and runs out of growth/steam. We do not have the type of stocks you can pass on to your grandkids here.
Also Australian companies are usually small on a global scale (with a few exceptions) and when they try to expand overseas they typically lose a bunch of shareholders money and then divest their foreign operations to "focus on our core domestic market". The Australian companies that expand overseas profitably are the exception, although we do have a few global leaders (in the top 5 companies globally) in the online and the healthcare spaces such as Seek, Realestate.com, Computershare, CSL and Cochlear.
We do have some dynamic growing smaller companies but in Australia because there are a glut of analysts and fund managers (more managed funds than stocks) chasing a small pool of profit making companies even when a company with only $5 million in revenue turns profitable (for example less than a million in NPAT) there will often be three stock broking analysts covering the stock and multiple small and microcap fund managers buying it. This makes it relatively hard to find bargains in the micro-cap to small cap end compared to many other markets
If anyone has any questions feel free to ask away.
